Australia & NZ Morning Thoughts

Australia & NZ Morning Thoughts

Imre Speizer

Sentiment reversed overnight. Initial
optimism fueled by some strong US data (home sales, consumer confidence) took
the S&P500 to a fresh record high. However geopolitical concerns later in
the NY session helped it reverse to -0.3% currently. Syrian warplanes
attacked Iraq and a Ukraine helicopter was shot down. Also noted was a 7%
fall in Dubai's stock index, for a total of 28% since mid-May.

6:12AM, 25 Jun 2014

Market Wrap:

Global market sentiment: Sentiment reversed
overnight. Initial optimism fueled by some strong US data (home sales, consumer
confidence) took the S&P500 to a fresh record high. However geopolitical
concerns later in the NY session helped it reverse to -0.3% currently. Syrian
warplanes attacked Iraq and a Ukraine helicopter was shot down. Also noted was
a 7% fall in Dubai’s stock index, for a total of 28% since mid-May.

Interest rates: US 10yr government bond
yields fell from an early NY peak of 2.62% to 2.58%, global risk aversion the
main factor. The 2yr yield initially bounced to 0.48% but later fell to 0.46%.
A 2yr auction saw a slightly sub-average bid-cover ratio.

Australian 3yr
government bond future yields fell from 2.76% to 2.70% - a 10-month low – amid
the risk averse climate. The 10yr yield fell from 3.66% to 3.61% - a one-month
low.

Currencies: The US dollar index
initially rose but then slipped with risk sentiment. EUR fell from 1.3628 to
1.3584 before rebounding. USD/JPY initially rose from 101.85 to 102.17 but
later retraced. AUD fell throughout the evening, from 0.9428 to 0.9371.
Similarly, NZD fell from 0.8723 to 0.8679. AUD/NZD eked a narrow 1.0790-1.0805
range.

Economic Wrap:

US new home sales jumped 18.6% in
May, the
biggest percentage rise since the early 1990s although at the peak of the boom
in 2005, the annualised sales pace rose by a greater number, including in the
month of the peak, almost nine years ago in July 2005. At 504k, May’s
annualised sales pace is the highest since mid 2008, though it recovers just
5.9 ppts of the 80.5% peak to trough decline in sales between 2005 and 2011;
sales are still down 63.7% from nine years ago. Looked at on a chart of new
home sales since 2000, the May rise is just a hiccough. What’s more, even with
the May spike, the annualised sales pace so far this year of 446k compares to
447k in the first half of 2013, so on that basis the new build market has
really just been treading water. A downward revision next month to say 12% and
a 4% fall in June would leave sales on 443k annualised for the year; that’s not
a forecast, just a reality check from someone who has watched these figures
each month since 1990! Regionally, sales were up slightly in the Midwest but
surged elsewhere in May.

US established house prices rose
5.9% yr in April according to the FHFA, but by 10.8% yr according to S&P Case
Shiller, the latter the slowest in a year. Meanwhile new house prices rose 6.9%
yr in May.

US consumer confidence rose from
82.2 to 85.2 in June, its highest since early 2008, with gains in both present and
future components, the former including a further gain in the labour market
assessment.

US Richmond Fed factory index
dipped from 7 to 3 in June. After starting the year at close to 3 year highs, 13 in Dec and
12 in Jan, this regional survey slumped 19 pts in Feb and March, before
recovering 14 pts in April-May, possibly a function of weather disruption and
recovery. But the 10 pt loss between December and June contrasts with 11.4 and
17.1 pts gains over the past six months for the NY and Philly Fed indices. In
June, Richmond saw shipments down from 10 to 2, orders up from 3 to 4 and jobs
down from 10 to 3.

German Ifo business climate index
down from 110.4 to 109.7 in June, its third decline in four months. Current conditions were
steady but expectations continued to slip. Even so, at 109.7 the index was not
higher at any point from August 2011 to the end of last year.

UK mortgage approvals by banks slowed from 41.9k to
41.8k in May, the fourth month running that approvals have eased from their
January peak of 48.4k.

Bank of England Governor less
hawkish before parliamentary committee. “Developments on the wage front
suggest to me that there has been more spare capacity in the labour market than
we had thought... [policy] will be driven by the data”. He indicated that the
medium term outlook for rates was important than the timing of the first rise,
but one petulant MP complained “It strikes me that the bank’s behaving a bit
like a sort of unreliable boyfriend. One day hot, one day cold and the people
on the other side of the message are left not really knowing where they stand.”
I hear you brother! Sterling was weaker on the testimony.

Market Outlooks:

Event risk today: Another quiet day
locally. The NZ calendar is bare, and in Australia there’s only RBA Deputy
Governor Lowe’s speech in Melbourne to watch. A highlight today will be the
June China consumer confidence survey. Tonight’s key event will be the US Q1
GDP final report, where a chunky downward revision is expected. There’s also
durable goods orders and personal consumption to watch.

AUD/USD 1 day: An unexpected bout of
risk aversion has caused only short-term damage to the AUD - 0.9370 below is
vulnerable today.

AUD/USD 1-3 month: The RBA is expected to
remain on hold until August 2015, but markets will start pricing in the
tightening cycle by late 2014 which should eventually boost AUD above 0.9460.

NZD/USD 1 day: An unexpected bout of
risk aversion has caused only short-term damage to the NZD - 0.8645 below is
vulnerable today.

NZD/USD 1-3 month: Interest rate carry
will benefit the NZD against most major currencies over the next few months.
NZD/USD targets the May high of 0.8800.

AUD/NZD 1 day: Consolidating between
1.0750 and 1.0850.

AUD/NZD 1-3 month: Last week’s sharp
reversal puts it back in the old 1.06-1.09 range, with a neutral medium term
stance. At some point the market will start pricing in RBA tightening, but
that’s a story for late this year.

AU swap yields 1 day: In response to
movement in Australian bond futures overnight the 2yr should open around 2.85%
while the 10yr should open around 3.96%.

AU swap yields 1-3 month: The 2yr is drifting
towards the lower boundary of a multi-month 2.80%-3.05% range. The 10yr
recently based at 3.97% but that is now under threat. A break lower would
signal a larger move towards 3.70%. By late 2014, though, we would expect
markets to start pricing in RBA tightening.

NZ swap yields 1 day: In response to
overnight changes in US and Australian bond yields the 2yr should open down 3bp
at 4.16%, while the 10yr should open down 2bp at 4.87%.

NZ swap yields 1-3 month: The upward trend in NZ
interest rates remains intact, mainly due to NZ’s improving fundamentals and
RBNZ tightening cycle which is now in play. The 2yr targets beyond 4.30% during
the next few months. The 10yr should rise above 5.20% late in the year on the
RBNZ , assuming US yields do not fall again . The curve should flatten
throughout 2014.

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